I am a long term buy and hold investor who focuses on dividend growth stocks

Monday, September 8, 2014

Two High Yield Companies Raising Dividends in the past month

In the past couple of weeks, there were two high yielding dividend growth stocks, which announced dividend hikes. I typically look for sustainable dividend payments, which can also grow over time. The companies I am about to mention, pay a large portion of earnings per share to shareholders in the form of distributions, which is why future expected growth is not going to be very high. However, for those who need high current income today, companies like those could be decent holdings in a diversified income portfolio. I hold stakes in both companies, and enjoy getting paid to own those shares. It is a very nice feeling to be paid cash dividends that grow faster than my salary, even if I decide to stay in bed and watch soap operas all day long. With dividend investing, the big money is made by sitting, or sleeping, rather than through frenetic investment activity.

The companies raising distributions include:

Verizon Communications Inc. (VZ) provides communications, information, and entertainment products and services to consumers, businesses, and governmental agencies worldwide. The company raised its quarterly dividends by 3.80% to 55 cents/share. Verizon has managed to boost dividends for 10 years in a row. Over the past decade, Verizon has managed to increase dividends by 3%/year. Currently, this dividend achiever is attractively priced at 14.10 times forward earnings and yields 4.40%. I would expect that Verizon manages to grow dividends per share by about 3% - 4%/year in the foreseeable future. Check my analysis of Verizon.

Altria Group, Inc. (MO), through its subsidiaries, manufactures and sells cigarettes, smokeless products, and wine in the United States. The company raised its quarterly dividends by 8.30% to 52 cents/share. Altria has managed to boost dividends for 45 years in a row. Over the past five years, Altria has managed to increase dividends by 9.20%/year. Currently, this dividend champion is attractively priced at 16.90 times forward earnings and yields 4.80%. I would expect that Altria manages to grow dividends per share by about 6%/year in the foreseeable future, driven by its pricing power, strong position in the domestic tobacco market, as well as its 27% interest in SAB Miller. I will reinvest those dividends from Altria into more Altria shares. Check my analysis of Altria.

Both companies are valued properly right now for patient long-term investors, who also need income right now. For example, if we assume a 30 year investment period, and 3% annual growth in earnings per share, and require a 10% annual return, the discounted valued for Verizon is approximately $45.20/share. Using the same parameters for Altria, the discounted value comes out to $32.60/share. Those are of course very conservative expectations, although those fair values represent the value of the business to a private owner. Of course, in the case of Verizon, the future growth would likely be around 3%/year, whereas for Altria I expect that earnings per share to be closer to 5% – 6%/year for the next 30 years. The majority of growth in earnings will likely occur in the first 15 years or so, after which growth will probably get lower.Of course, I don't really do much in terms of discounted analysis, but based on what I know from analyzing both businesses, I prefer Altria to Verizon. Let's circle back in 20 years, and see if I was right.

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